Why Are Student Loans Considered Good Debt? – Explained Simply
Most people that go to college end up with student loan debt. Often it’s seen as a means to an end, as in you have to spend a little money (or a lot) in order to improve your life. Most of the time we try to stay away from debt but could this kind actually be a good thing?
How can student loans be considered good debt?
Student loans are an investment in your future self. You are taking out a student loan, investing it into your education, and then getting paid back from your career later in life. This makes student loans a good investment and thus, good debt.
Now, I realize this is obviously the perfect scenario.
But perfect doesn’t *always* exist. Actually, it hardly ever exists.
How many of you know someone, or experienced it yourself, that went to college and changed their major 3 times. And after all that, ended up leaving college to pursue another career path. While we are all happy they found their calling, this doesn’t mean their student loan debt goes away. As many of you know, it follows you wherever you go.
This is what makes student loans dangerous. While they can be necessary to help you get your degree, it’s hard to know exactly what you want at 18 years old. Also as the price of college rises, sometimes that debt you take on is overwhelming. That’s why a common perception is student loan debt is bad debt.
Student Loans Are Dangerous
In the United States, student loan debt totals more than $1.5 trillion dollars. It’s hard to even imagine that amount of money and that number is growing every day. In fact, almost 70% of people who went to college have some form of student debt.
All debt is dangerous but frequently our attention is focused on paying down other debt like credit cards, or paying off a mortgage. We can’t forget our student loans though. While student loans may seem like a great idea at the time, in hindsight they may cost you.
For most, using student loans is the only option they have though to pursue secondary education. If that’s what you need to do to make your life better, then I’m all for it. So the question we need to be asking ourselves is how can we avoid the debt cycle that is caused by taking out student loans and then needing years to pay them off?
Use Student Loans Correctly
I will admit, the way our federal student loan structure is set up is predatory. The information they give you is vague and the result is people borrow much more than they actually need. They do an awful job of explaining to borrowers how the interest you are paying can grow exponentially and what happens if you don’t pay off the student loan. This interest causes that already large loan to become larger all the time.
In this scenario, student loans are definitely bad debt.
So how could they ever be good debt?
My favorite guest post on this website of all time was by someone who used student loans correctly. You can read that post here: How to Pay Off $25,000+ in Student Loans in 5 Years!
In short, (as you can tell by the title) she took out a significant amount of money in student loans and paid them off in half the time she was expected to. Most student loans, especially government-backed, have a 10-year pay off period. But you don’t have to take that long. You can always pay them off early.
For obvious reason, I suggest everyone I coach to pay them off as fast as possible. In many cases, their student loans are good debt and they served their purpose but it is time to get rid of the monthly payment.
You Can Negotiate Your Student Loans
If you feel like you are stuck with your student loans, you’re having trouble making payments, or you’re just frustrated in general, then know you aren’t alone. The great news is you can actually negotiate your student loans.
With nationwide student loan debt on the rise, you have the introduction of companies helping young adults either refinance or combine their student loans. A result of this is usually better terms for you.
As you’ve gotten older, chances are your credit score has increased. This should immediately drop the interest rate on your loan. Moreover, combining all of your different student loans into one loan makes it easier to manage. One payment is much less overwhelming. You understand exactly how much money you need to pay on that loan every month.
Like anything, there are also companies out there just trying to take your money so before you sign any papers, make sure you do your research. Additionally, reach out to people you trust to look things over. By taking a little more time to double-check things, you may be saving yourself from signing into even more debt.
A 2-Minute Calculation
When you take out student loans, specifically from the federal government, they give you a 10-year time table to pay it off. Let’s be honest, 10 years is a long time. In fact, it’s 10% of your life if you are lucky enough to live till 100.
Who wants to be paying down debt for 10% of their life though?
When I coach people I tell them to aim to pay down their student loans in 5 years. Now, most people I work with already have student loans but I have worked with people who are thinking about taking them out.
No matter what I can’t make decisions on their future. Decisions like where they go to school, what they study, and how much debt they take out. But I can talk them through the process so they can make the best decision for themselves.
A quick and dirty calculation I like doing with them is estimating the amount of money they will make after they’ll make in a year after graduation and that being the max amount of student loans they take out. For example, if you think you’ll make $60,000 a year then that’s the max amount you should need.
The thought process here is that you should aim to pay down your student loans in 5 years, not 10. After you graduate and start your job you then put 20% of your income to your student loans isn’t a ridiculous ask. This will mean sacrifices but removing that debt from your life will be worth it.
Obviously, everyone’s situation will be different but it is a simple exercise to see where you land.
The Bottom Line
Before you sign your name on any dotted line relating to debt, make sure you have done your homework first. You are the customer so ask as many questions as you need to and take your time. Remember that this is a decision that could affect you for the next couple of decades.
Student loans can be a powerful form of good debt that can put you on a path for a happy, successful life. But it can be a double-edged sword.
When used incorrectly, like any form of debt, it can be a burden for many years and cost you tens of thousands of dollars. That’s the opposite of what we’re learning to do here so choose your debt wisely.
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